Momentum Monday – Market of Stocks

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The dips continue to get bought for the most part. The major large-cap U.S. stock indexes, QQQ and SPY spend the last couple of weeks in a tight consolidation and are potentially getting ready for another leg higher.

Market breadth is still healthy. We see strength in restaurant stocks like CMG and MCD, fashiology names like LULU, NKE, and AAPL, digital payments, biotech, emerging markets, China, etc.

One of the main warning signs right now is the continued underperformance of small-caps. Russell 2000 is still struggling below its 200-day moving average. The other worry is the coming massive wave of supply via new monstrous-size IPOs like Lyft, Uber, Pinterest, and others.

Check out my latest two trading books:

Swing Trading with options – How to Trade Big Trends for Big Profits

Top 10 Trading Setups – How to find them, hot to trade them, hot to make money with them.

Hard Times In Front of Restoration Hardware?

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RH had a tough day on Friday. The market didn’t like the lack of sales growth and sent their shares 20% lower near the $100 mark. Since $100-105 has acted as resistance before, many assume that it can act as a support today.

RH is a highly shorted stock with a tiny 18-million shares float. 35% of its float is short. If enough short sellers decide to cover near $100, we might see a dead-cat bounce to 110-115 in a short-term perspective.

From a longer-term perspective, things are not that rosy for RH. The CEO of the company borrowed heavily in the past few years in order to buy back RH shares. As a result, RH became highly leveraged with a debt/equity ratio of 37 and its outstanding shares have declined substantially: from 40 million to 27 million shares. The drop in outstanding shares is the main reason why RH can report a 75% earnings growth along with 0% sales growth.

To sum things up: RH is leveraged to the hills, it is in the highly cyclical overpriced furniture business and its sales are not growing. The company borrowed a lot of money to buy back its own stock at a very high price. When the next recession comes, I won’t be surprised to see RH trading under $10 per share. People should treat it as a short-term trading vehicle and not as a long-term investment.

I have no position in RH.

Check out my last two trading books:

Swing Trading with options – How to Trade Big Trends for Big Profits

Top 10 Trading Setups – How to find them, hot to trade them, hot to make money with them.

Momentum Monday – Inflection Point?

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The yield curve is flat. The 10-year note is currently yielding as much as the one-month treasury. This is the bond market’s way of forecasting a potential recession down the road. Was Friday the day the stock market woke up and started to discount the same? It is too early to say. One down day doesn’t make a trend.

Small caps are looking ominous with that high-volume reversal off their 200-day moving average on Friday. Many tech momentum stocks are quite extended and also vulnerable to quick 5-15% pullbacks.

Check out my last two trading books:

Swing Trading with options – How to Trade Big Trends for Big Profits

Top 10 Trading Setups – How to find them, hot to trade them, hot to make money with them.

Top 1% Stocks To Keep An Eye On

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High-momentum stocks can be excellent sources of swing trades because they tend to make big moves in both directions. Here are a few stocks with a relative strength rating of 99 that might offer good opportunities in the next few days/weeks:

AMRN bounced from its rising 50-day moving average. It needs to clear $20 to get me interested on the long side.

CRON – cannabis stock working on a high tight flag. It needs to clear $22 – 22.30 to get me interested.

SE – a few days tight of tight-range consolidation near its all-time highs.

Check out my last two trading books:

Swing Trading with options – How to Trade Big Trends for Big Profits

Top 10 Trading Setups – How to find them, hot to trade them, hot to make money with them.

Momentum Monday – The Dips Continue To Get Bought

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Dip buyers continue to dominate the tape. The tech sector is leading again. Enterprise software, semiconductors, the FANGs are all looking strong, breaking out or setting up for a potential breakout.

Emerging markets are also starting to wake up. We are seeing notable relative strength in India, select Brazil and Chinese names. It’s usually good news when the more sectors join the market rally.

We continue to trade in a market of stocks environment, where stock picking matters.

Check out my latest book: Swing Trading with Options – How to trade big trends for big returns.